Lloyds Says Yes To HBOS Deal

As expected, Lloyds TSB shareholders approved the acquisition of rival HBOS with a significant majority on Wednesday. It was the safest option in the current climate, but one which failed to stem a fall in the bank's share price, as future uncertainty remained potent.

Shares of Lloyds TSB fell 9.7%, to 118.50 pence ($1.78), in London at the close on Wednesday, after trading mostly flat throughout the day; the FTSE 100 index was down 4.8%. HBOS, meanwhile, ended the day up 2.1%, to 64.30 pence (97 cents). The renegotiated terms of the deal will offer 0.605 Lloyds shares for each HBOS share acquired, or a cheaper price than first approved, but the deal is not seen as ideal for Lloyds. Expanding in the current environment is risky, particularly with HBOS' significant mortgage portfolio.

HBOS shareholders are scheduled to vote on the takeover deal on Dec. 12, and are expected to approve it.

The risks of not approving the deal are far more ominous than those of letting the acquisition go ahead. Aside from the direct impact a rejection would have on the share price of
HBOS
, it would also make capital-raising more expensive for
Lloyds TSB
--in turn, hurting the bank's own share price.

The reason for this lies in the terms of the British government's bank recapitalization scheme, set out in October and drawn up on the basis that Lloyds would take over HBOS. According to Credit Suisse analyst Jonathan Pierce, if the banks do not merge, Lloyds TSB will have to raise an extra 1.0 billion pounds ($1.5 billion) and HBOS will have to look for an additional 500.0 million pounds ($753.1 million). He added that Lloyds might then have to issue 70.0% more shares than in the current plan, leaving the government--which is taking on preferred stock--with a 42.0% stake rather than a 30.0% stake.

Still, Lloyds' conservative, risk-averse strategy during the most excessive years of the bull market means the bank's board has mostly preserved the trust of its shareholders. Over at
Barclays
, relations are trickier: investors have punished the bank for raising money from Middle Eastern sources, without initially allowing ordinary shareholders to increase their stakes.